Ofgem, the UK energy regulator, has confirmed the energy price cap will increase by 6.4% from April 1, 2025. This will see the average annual energy bill for a typical household paying via direct debit rise from £1,738 to £1,849. The regulator has credited the increase to continued volatility in global energy markets and ongoing economic pressures. 

This article explores the reasons behind the rise, its impact on households and businesses, and what steps consumers and companies can take to manage their energy costs.

Understanding the Energy Price Cap

The energy price cap, first introduced in 2019, is designed to protect consumers from excessive charges by limiting the amount suppliers can charge per unit of electricity and gas. While the cap does not impose a maximum total bill, it limits the rates suppliers can charge customers on default or standard variable tariffs.

Ofgem reviews it every three months to reflect changes in wholesale energy prices, network costs, and government policy. 

Why Is the Energy Price Cap Increasing?

Several key factors have contributed to the latest price cap increase:

• Rising Wholesale Energy Prices: The wholesale cost of gas and electricity remains high due to supply constraints and increased demand, particularly during the colder months.
• Geopolitical Uncertainty: The ongoing war in Ukraine continues to disrupt global energy supplies, pushing up prices across Europe.
• Infrastructure Costs: The UK’s energy grid requires constant investment in maintenance and improvements, with costs being passed on to consumers.
• Reduced Government Support: Temporary government assistance, such as the Energy Price Guarantee and direct bill subsidies, has been phased out, leaving consumers more exposed to price fluctuations.

When will prices fall?

Experts believe that natural gas costs will remain high over the coming months due to Europe’s need to restock ahead of winter 2025. But the prospect of a settlement between Russia and Ukraine has brought prices down slightly.

As a result, market analysis suggests bills may begin to fall in July.

Trusted forecasters Cornwell Insight see a slight fall to £1,756 as likely, but they caution that the forecasts will be changed to reflect market volatility in the coming months.

Impact on Households

The increase in the energy price cap will affect around 28 million households on standard variable tariffs (SVTs), while those on fixed-rate deals will remain unaffected until their contracts expire. 

This means households already struggling with the cost-of-living crisis may find their financial burden worsening as energy prices continue to rise.

Who Will Be Most Affected?

• Low-income households: Many vulnerable households rely on SVTs and may struggle to absorb the additional costs.
• Tenants in rented accommodation: Those without control over their energy provider could face higher bills without the ability to switch to a cheaper tariff.
• Large families and high-energy users: Homes with higher energy consumption will see a more significant increase in costs.

Support for Consumers

The government and energy providers offer various schemes to help households manage rising costs:

• Warm Home Discount: A one-off £150 discount for eligible low-income households.
• Winter Fuel Payment: Extra financial support for pensioners to help cover energy costs during colder months.
• Energy Efficiency Grants: Homeowners may qualify for funding to improve insulation and heating efficiency, reducing long-term costs.

Impact on Businesses

Unlike domestic consumers, businesses do not benefit from the Ofgem price cap, meaning they are more exposed to fluctuating energy prices. The impact will vary depending on the size and sector of the business, with energy-intensive industries such as manufacturing, hospitality, and retail facing the greatest challenges.

Key Concerns for Businesses

• Increased Operating Costs: Higher energy prices will directly raise overhead expenses, squeezing profit margins.
• Competitive Disadvantage: Businesses in the UK could struggle to compete with international counterparts facing lower energy costs.
• Reduced Consumer Spending: As households spend more on energy, discretionary spending on goods and services may decline, affecting revenue streams for businesses.

How Can Businesses Mitigate Rising Energy Costs?

Businesses must take proactive steps to manage their energy expenses and improve efficiency:

1. Consider Fixed-Term Contracts: Locking in energy rates for a set period can provide price stability and protect against future increases.
2. Invest in Renewable Energy: On-site solar panels, wind turbines, and battery storage systems can reduce long-term reliance on the grid.
3. Enhance Energy Efficiency: Implementing LED lighting, smart thermostats, and energy-efficient machinery can significantly lower consumption.
4. Explore Government Support: Businesses may qualify for tax incentives, grants, and energy efficiency schemes to offset costs.
5. Conduct Regular Energy Audits: Assessing energy use can help identify inefficiencies and opportunities for savings.

What Next?

While the April increase in the price cap is concerning, some analysts predict a possible decline in wholesale energy prices later in 2025, which could lead to a reduction in the cap from July. However, continued market volatility makes it difficult to forecast long-term trends with certainty.

For now, both households and businesses must remain vigilant in managing their energy usage and exploring cost-saving measures. With the right strategies, consumers and companies can mitigate the impact of rising energy prices and work towards a more sustainable and affordable energy future.

The latest price cap increase highlights the UK’s ongoing energy challenges, from supply constraints to policy shifts. While short-term relief may be limited, long-term investments in energy efficiency, renewable technology, and strategic energy management will be essential in navigating an unpredictable market. Staying informed and proactive will be key to weathering the current energy crisis and preparing for future changes.

‍